TaxTMI 
TaxTMI 
2015 (11) TMI 1827
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.... 3 For these and such other grounds as may be urged at the time of hearing, the order of the Ld. Commissioner of Income-tax(Appeals) may be vacated and that of the Assessing officer be restored. 4 The appellant craves to add, am end, alter or delete any of the above ground of appeal during the course of appellate proceedings before the Hon'ble Tribunal. 3. The issue in ground of appeal No.1 raised by the Revenue is against the deletion of addition made on account of disallowance of research and development expenses amounting to Rs. 11,15,01,210/-. 4. The brief facts of the case are that the assessee was engaged in the business of auto ancillary unit and manufactured the parts needed for the vehicles of different makes. In other words, the assessee was a vendor for automobile manufactures. The major customers of the assessee were Tata Motors Ltd., Bajaj Auto Ltd., Kinetic Engineering Ltd., Mahindra & Mahindra Ltd., etc. The claim of the assessee before the authorities below was that in the process of manufacturing a vehicle, such automobile manufacturers first assess the marketability of the vehicle that is in pipe line of designing. Then, the design of ve....
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....ment relating to the assessee's business. Further noted that there was no dispute between the rival parties on the fact that the expenses per-se were for purchase of materials, consumables and spares, salary and wages and other Revenue expenses used for the development of processes and designs. The CIT(A) observed that the expenditure was incurred for bringing improvement in the designs and process given by the vendor companies and therefore, per-se these were apparently of the nature of Revenue expenditure, where the expenditure had not been incurred for the purchase of land or building or machinery etc., but it had been stated by the Assessing Officer that the aforesaid expenses had resulted into coming into being of processes and designs, which had enduring benefit and therefore was capital in nature. The necessary evidence was filed before the CIT(A) to show that the patents had not been registered on technical ground. The claim of the assessee was that the reliance placed by the Assessing Officer on the decision of CIT Vs. Madras Auto Services Pvt. Ltd., 233 ITR 468 (SC) was not in proper appreciation of facts and law. The aforesaid expenses were in the nature of Revenue expen....
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....wn the said amount as current assets and no claim was made in the Profit & Loss Account and hence, there was no question of allowing of said expenditure. He stressed that since the design has been made by the assessee, the expenditure was capital in nature and hence, not allowable. 8. The Ld. AR for the assessee drew our attention to the details of the R&D expenses placed at page 163 of the Paper Book and it was pointed out that the assessee was in line of auto parts and ancillary unit for the past several years. It was pointed out by the Ld. AR that the main customer of the assessee was Tata Motors, which was manufacturing body parts. For the said concern, because of the R&D expenses carried on by the assessee, it reduced the cost of the load and against which the assessee also received certain compensation. The learned Authorized Representative for the assessee pointed out that the said expenditure was allowed by the CIT(A) under section 35(1)(i) of the Act, but it is clear that the nature of expenses was not capital in nature. Our attention was drawn to the Notes and activities of the assessee placed at page 159 of the Paper Book and letter of Tata Motors at page 173 of the P....
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....tablished that the accounting entries in the books of account of any person or how it is reflected in the balance sheet and / or the Profit & Loss Account is of no consequence, in determining whether the said expenditure is an allowable deduction or not. The law on the issue is that the accounting treatment given by the assessee in its books of account is not determinative whether or not the expenditure is allowable as a deduction. In order to be eligible for deduction, it has to be seen whether the expenditure is revenue in nature. Where any expenditure has been incurred which is capital in nature, then in such circumstances, the said expenditure is to be capitalized in the hands of the assessee. Looking at the nature of expenditure incurred by the assessee, we are of the view that the same is revenue expenditure allowable as deduction in the hands of assessee either under the provisions of section 35(1)(i) or 37(1) of the Act. The expenditure having been incurred by the assessee by way of research, which resulted in reduction in the weight of body parts and also generation of revenue in the hands of assessee to the extent of Rs. 4.20 crores cannot be said to be capital expenditur....
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....ould not be disallowed under section 37(1) of the Act as the same related to the loan taken for acquisition of fixed assets and acquisition of foreign subsidiary. The assessee in reply, contented that the premium paid was in the nature of commitment charges or liquidated damages and was business loss to the assessee and was expended solely for the purpose of business. The Assessing Officer was of the view that where the loan from Citi Bank was obtained for acquiring fixed assets and for acquisition of foreign entity and where the assessee had obtained loan from Citi Bank, then there was no occasion to go for contract with DBS Bank for foreign exchange fluctuation cover. Where the foreign exchange fluctuation cover was taken in relation to loan acquired for purchasing fixed assets and foreign acquisition, the expenditure was connected with fixed assets and was capital in nature and not revenue expenditure. The Assessing Officer thus, held that the claim of the assessee that these were liquidated damages for breach of contract and were allowable was mis-placed since the expenditure was not in connection with the breach of contract in respect of sale of material or revenue activities,....
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....sessee on the other hand, pointed out that the commitment charges paid to DBS Bank for shifting the forward contract cover from DBS Bank to Citi Bank, which was the principal lender of the assessee was paid neither for acquisition of assets nor for any capital field and hence, was an allowable expenditure. The learned Authorized Representative for the assessee further referred to the agreement entered into between the assessee and DBS Bank placed at pages 257 to 267 of the Paper Book and pointed out that the term of agreement was up to 25.09.2012. He further pointed out to the early termination letter of DBS placed at pages 283 and 285, under which the agreement was terminated w.e.f. 04.03.2008 subject to payment of commitment charges. Reliance in this regard was placed on the ratio laid down by the Hon'ble Supreme Court in DCIT Vs. Gujarat Alkalies & Chemicals Ltd., (2008) 299 ITR 85 (SC) and Addl.CIT Vs. Akkamba Textiles Ltd. (1997) 227 ITR 464 (SC). It was further pointed out by the learned Authorized Representative for the assessee that the reliance placed upon by the learned Departmental Representative for the Revenue in the decision of Mumbai Bench of Tribunal in Mahindra & M....
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....penditure was rejected by the Assessing Officer. In view of the proportionate disallowance of interest paid to Citi Bank, the Assessing Officer worked out the proportionate amount of Rs. 67,51,549/- and disallowed the same. 18. The first aspect considered by the CIT(A) was whether the said expenditure was hit by the provisions of section 36(1)(iii) or 37(1) of the Act, since the expenditure was not in the nature of interest. The finding of the CIT(A) in this regard is that it is not deductable under section 36(1)(iii) of the Act, which specifically dealt with allowability of interest on borrowed capital for the purposes of business or profession as revenue expenditure. The CIT(A) was of the view that the case of the assessee had to be seen in purview of the provisions of section 37(1) of the Act, which allows any expenditure expended wholly and exclusively for the purpose of business, where the same was not in the nature described in sections 30 to 36 of the Act and was not in the nature of capital expenditure or personal expenditure. Admittedly, th e expenditure is not in the nature described in sections 30 to 36 of the Act, but the question which arises for adjudication before....
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....h commitment charges paid by the assessee having been paid during the course of carrying on its business are allowable as revenue expenditure in the hands of the assessee. The same are not relatable to loan taken by the assessee from Citi Bank for acquisition of assets. However, the foreign exchange cover was taken by the assessee in order to prevent itself from future currency rate fluctuations. The expenses have been incurred for the purpose of business are incidental to carrying on of the business by the assessee, are allowable as expenditure under section 37(1) of the Act. We find support from the ratio laid down by the Hon'ble Supreme Court in DCIT Vs. Gujarat Alkalies & Chemicals Ltd., (supra) and Addl.CIT Vs. Akkamba Textiles Ltd. (supra) for the said proposition. We uphold the order of CIT(A) in this regard. 20. The learned Departmental Representative for the Revenue has placed reliance on the decision of Mumbai Bench of Tribunal in Mahindra & Mahindra Ltd. Vs. DCIT (supra). In the facts of the said case, the assessee had taken loan in US Dollars for investment in new project and was to be utilized for the acquisition of capital assets. However, eventually, the assessee ....